Hotels are Losing €47 million due to Inefficient Pricing

14 November 2017

Imagine you have a hotel with 100 rooms. Would you rather have those 100 rooms occupied at a price of 50 euros per room or 50 rooms occupied at a price of 100 euros? The total revenues would be the same, 5000 euros per day, but the second option is more profitable: the costs associated with providing service to 50 rooms are lower than with 100 rooms. Also, in the second option, there are still vacancies which could potentially be filled, increasing revenue.

The above question is not a problem of logic; it is a simple way to exemplify the idea of “revenue management” at a hotel. And this is precisely the concept behind BlueShift’s study, “The Impact of Tourism Growth on Occupancy Rates and Average Prices Between 2012 and 2016.”

The study concludes that many hotels in Portugal are prone to an inefficient management, generating hidden losses. The study highlights that the greatest losses inherent to management inefficiencies occur in the regions of Madeira, Azores and North. It compares the evolution between 2012 (before the tourist “boom”) and 2016 (record year) of the occupation rate with the average price in each region of the country.

The report estimates “a loss of revenues related to unrealised operating results for all hotels of around €47 million, or about 12% of the sector’s results at the national level.”

BlueShift points out that “operating profitability is maximised through growth based not only on the occupancy rate but also on average prices.” That is, “an increase of one euro in price translates directly into result, but if that euro is generated by a room being occupied, it is then necessary to subtract any variable costs, with the remainder counted towards results (optimally around 40%) ”

“Companies with fewer skills and tools tend to grow primarily through the occupancy rates because they simply have to ‘have the door open’ to get more customers,” BlueShift writes. “On the other hand,” the study continues, “companies with greater planning and forecasting capacity will be able to strategically manage their revenues by pushing a part – or even most – of demand pressure to the price variable, in search of better operational profitability. ”

The study by BlueShift, a hotel management and consulting group, two groups of regions are analysed in detail: in the Lisbon, Algarve, Centro and Alentejo group, revenue growth is “balanced between Occupancy Rates and Average Prices”; in the Madeira, Azores and North group, the Average Price “only belatedly responds – with a lapse of two to three years – to new demand cycles.”

Original Story: Expresso

Translation: Richard Turner